Stepped-up basis


Stepped-up basis

Stepped-up basis basis is the term used to describe the basis of property that a taxpayer receives from a decedent under the Internal Revenue Code § 1014(a).

General rule

Under IRC § 1014(a) the general rule applied to property a beneficiary receives from a decedent is that the beneficiary's basis equals the fair market value of the property at the time the decedent dies. For example, Decedent owns a home she originally purchased for $35,000. Her basis in the home is equal to its cost, $35,000, assuming no adjustments under IRC § 1016. On the day Decedent dies, the fair market value of the home is $200,000. If Decedent wills the home to Beneficiary, Beneficiary's basis in the home will be the fair market value, $200,000. In contrast, had Decedent gifted the home to Beneficiary before her death, Beneficiary would receive a carryover basis, which would be equal to the decedent's adjusted basis in the home, $35,000. [IRC § 1015(a).]

Stepped-down basis

Likewise, under § 1014(a), if a decedent's adjusted basis in property is higher than the fair market value, the beneficiary's basis will equal the fair market value of the property at the time the decedent dies. For example, Decedent owns a yacht whose adjusted basis is $150,000, but at the time of her death, the fair market value of the yacht is only $110,000. The beneficiary's basis in the yacht will be the fair market value, $110,000.

Incentive for Taxpayers

Because of this provision, any appreciation of the affected property that occurred during the decedent's lifetime will never be taxed. Thus, this provision provides an incentive for taxpayers to retain appreciated property until death and sell depreciated property while they are alive.

§ 2032 Election for Alternate Valuation

Section 2032 provides an alternate method of determining the property's new basis. If the property is not disposed of within six months of the decedent's death, the executor may elect to use the property's fair market value six months after the date of death. If the executor does not so elect, or if the property is disposed of before the six months have passed, then the property will still assume a basis equal to its fair market value at the time of death.

Definitions

"Property acquired from the decedent" under IRC § 1014(b) generally includes property acquired by bequest, devise or inheritance, property the decedent gives to his or her estate, and certain revocable trusts. [See IRC § 1014(b)(1)-(10) for a complete list of "property acquired from the decedent."]

Rationale for stepped-up basis

One possible explanation for the stepped-up basis rule under IRC § 1014 is to avoid the difficulty of ascertaining a decedent's adjusted basis in property that could have been held for decades. [Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 123 (2nd Ed. 2007).] A second theory is that a decedent is not likely trying to evade taxes by passing property at death, so mandating carryover basis, which would preserve the gain in the beneficiary, is unnecessary. ["Id."] Third, the federal government imposes estate taxes on transfers of wealth at death. [See Title 26 of the United States Code, Subtitle B, Chapter 11, Subchapter A for the federal estate tax.]

Sunset provision

IRC § 1014(f) states that this section shall not apply to decedents who die after December 31, 2009. This sunset provision is a result of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Under the EGTRRA, IRC § 1014 will be repealed. EGTRRA replaces § 1014 with a modified carryover basis rule, under which the property will receive a basis equal to the lesser of the adjusted basis of the property in the hands of the decedent, or the fair market value of the property on the date of the decedent's death. [26 U.S.C. § 1022]

The repeal of § 1014, along with the repeal of the estate tax, are scheduled to be in effect only during 2010. [Donaldson 2007, p. 133.]

References


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